Annual Report Inditex 1998

1998 annual report

Inditex Group

1998 annual report

1. Chairman’s statement

5

2. international presence

9

3. financial highlights

13

4. general information

21

Inditex Group Zara Pull & Bear Massimo Dutti Bershka

1. Chairman’s statement

1998 annual report 3

It gives me great pleasure to present the Annual Report of the INDITEX Group for the FY 1998.

The desire for innovation and constant improvement with which we began this project 36 years ago is the motivating idea which has guided us up to the present time. Now we have the privilege of seeing how this original idea, from which many others, with an open and creative mind, have emerged and continue to emerge, has converted itself into the INDITEX Group.

This desire for innovation leads us to approach 21st century society with a vision of the future which, with its basis in the diversity of components and scenarios forming our company, continues to drive us to face the challenges of the ever-more global society of which we are a part.

We must be aware that the experience we have gained is not enough to guarantee our leadership. We must also be faithful to the commitment to effort and improvement which inspires our company. More than 12.000 people from many different countries currently make up our Group. This diversity is synonymous with open-mindedness and flexibility, and pushes us to continue evolving, with enthusiasm and perseverance, towards new projects.

This report transmits a vision of the realities and the projects of the INDITEX Group and our capacity to adapt ourselves to the demands of our environment in the widest sense.

We have to be aware of the challenges that our Group faces. International expansion, carried our both independently and through agreements with other companies, is the objective that cannot be delayed and will allow us, through diversity, to enrich our culture and vision of the market. The creation of new chains and the widening of our product ranges is our response to the new opportunities of the environment. In short, the idea of innovation and constant improvement, which I mentioned before, must keep on being the motivating idea of our Group throughout the 21st century.

Finally, I would like to express my appreciation to all the people who work in the INDITEX Group and who through their dedication, enthusiasm and sacrifice, make the attainment of new goals possible every day.

Chairman

1998 annual report 4

2. international presence

1998 annual report 5

Inditex Group A whole world to dress Norway MD

1

Sweden MD 6 U.K. Zara 1

Belgium Zara 12 P&B 1 MD 4 USA Zara 7

Greece Zara 13 P&B 4 Turkey Zara 2 MD 1

Spain Zara 203 P&B 143 MD 110 BSK 32

Mexico Zara 18 MD 7

Portugal Zara 29 P&B 27 MD 25 BSK 6

Venezuela

Zara

Japan Zara 1 P&B 9

China P&B 1

Malta P&B 1

Dubai MD 1

1 Number of shops (31st January 1999)

France Zara 55

Kuwait Zara 1

Israel Zara 5 P&B 11

Argentina

Zara

4

Lebanon Zara 1

Cyprus Zara 1 P&B 1 MD 1 BSK 1

1998 annual report 6

3. financial highlights

1998 annual report 7

1998

Monetary Amounts in Million Pesetas (ESP) 1997 1996 1995 1994

GR 1998/1997

CAGR 1998 -1994

REVENUES Net revenues

268,665 202,565

167,795

143,617

125,815

33%

21%

Net sales in owned stores and franchises (VAT excl.)

253,818 191,020

155,882

133,969

117,305

33%

21%

Percentage of net sales abroad

46%

42%

36%

30%

25%

EBIT Consolidated income before taxes Consolidated net income for the year

39,098 38,100 25,440

30,395 29,583 19,564

24,366 18,657 12,131

21,347 15,387 9,155

18,057 14,092 8,713

29% 29% 30%

21% 28% 31%

Income atributable to the controlling company

25,480

19,532

12,102

9,093

8,539

30%

31%

EBITDA Cash - flow

54,184 40,473

42,196 30,535

37,161 21,481

29,239 19,114

23,371 14,427

28% 33%

23% 29%

112,040 15,477 -8,625

88,169 6,382 315

69,031 16,363 -6,724

51,241 13,742 -11,450

42,276 14,788 -11,195

27% 143% -8,940

28% 1%

PREOFITS & CASH-FLOW

FINANCIAL STRUCTURE Shareholders’ investment Net financial debt Working capital Financial

10,535

15,267

3,938

-159

581

-4,732

-19,160

-14,952

-10,662

-11,291

-11,776

-4,208

Total investment in fixed assets Number of stores In Spain

46,091 748 489

21,400 622 433

19,200 541 399

25,802 508 391

28,000 424 343

115% 126 56

13% 81 37

Abroad Average number of employees (*) In Spain Abroad

259 11,968 7,637 4,331

189 8,368 5,857 2,511

142 6,463 4,573 1,891

117 5,627 4,158 1,469

81 5,018 n/d n/d

70 3,600 1,780 1,820

45 1,737 1,909 1,083

327,490 261,372 193,614 163,767

233,374 151,653

209,918 144,348

184,279 136,638

66,118 29,847

35,803 14,244

36,271

21,559

Non financial OTHER INFORMATION

Average full time equivalents (*) Sales surface in square metres (sqm) In Spain Abroad

133,876

97,605

81,721

65,570

47,641

Average sales per square metre

0,78

0,73

0,67

0,64

0,64

Inventory turnover (purchases / average stocks) EBT on store sales

6,77 15%

7,31 15%

7,24 12%

8,21 11%

8,97 12%

Net profit on store sales Operating profit on store sales

10% 21%

10% 22%

8% 22%

7% 20%

7% 18%

Net debt on equity ROE (income attibutable on average shareholders’ invest.)

14% 25%

7% 25%

24% 20%

27% 19%

35% 22%

ROCE (EBIT over average capital employed) Cash - flow on net financial debt Cash - flow on net interest expenses

35% 3,50 54

34% 6,61 42

32% 2,27 37

35% 2,13 29

38% 1,58 23

2,0

1,8

2,0

2,3

2,5

MANAGEMENT RATIOS

FINANCIAL RATIOS

Net gearing (assets on equity)

1998 annual report 8

growth 1998

25.440

1998 40.473

1997

19.564

1997

30.535

1996

12.131

1996

21.481

revenues in millions

net profits

1996

167.795

1997

202.565

1998

268.665

In the fiscal year 1998 the Inditex Group has achieved revenues of Pta. 268,665 million, a 33% increase on the previous year. Net profit (Pta 25,480 milion) and funds from operations (Pta 40,473 million) increased by 30% and 33% respectively, on the previous year.

1998 annual report 9

Cash-flow in millions

in millions

The different chains of the Inditex Group (ZARA, Massimo Dutti, Pull & Bear and Bershka) have maintained a strong rate of growth, with 125 store openings. The number of stores by FYE1998 was 748. In 1998 a new chain was launched, Bershka, focussed on trendy fashion for the urban young girl.

By FYE1998 Bershka had 40 stores in Spain, Portugal and Cyprus. In 1999 it will reach a total of 69 stores.

1998 annual report 10

international expansion 1998

46.091

1997

21.400

1996

19.200

total investmentsin fixed assets in million

international business accounted for 46% of the total turnover in FY1998, versus 42% in the previous year

At the end of 1998 the Inditex Group was present in 21 countries. During that period it increased its international presence by opening new markets such as UK, Japan, Argentina, Venezuela, Kuwait, Lebanon, Turkey and Dubai.

The following is worth of mention: the opening of a flagship ZARA store in London (Regent Street, 1,800 sq. m.) meant the entr y in the UK market. A second store was opened in March 1999 in Bluewater (Kent). The opening of the first store in Asia, located in the Shibuya district in Tokyo, took place as part of an agreement with the Bigi Group for the Japanese market. This store will be followed by more in Osaka.

1998 annual report 11

by FYE1999 international business will represent over 50% of the total turnover 1998

112.040

1997

88.169

1996

69.031

shareholder's investment in million pesetas

During 1999 new markets have been entered such as Chile and Uruguay. In the rest of the year stores will be opened in Canada, Germany, Poland, Brazil, Saudi Arabia, UAE and Bahrain, expanding the Inditex Group’s international presence to 30 countries.

The entry of the Inditex Group into Germany, the biggest European market, through a joint-venture agreement with the Otto Versand Group

the Inditex Group has consolidated a presence in the biggest markets in the world and is well-positioned to maintain high growth rates in its activities in the coming years.

will mean the opening of ZARA stores in Cologne and Hamburg before the end of the year.

The entry into Brazil, the biggest retail market in Latin America, with four ZARA shops by the end of 1999 will mean the consolidation of the Inditex Group in the main markets of this area. The entry into Canada will also take place with stores in prime commercial areas in Toronto, Montreal and Vancouver by the end of 1999, through an agreement with The Reitmans Group.

1998 annual report 12

4. general information

1998 annual report 13

Inditex Group

The Inditex Group is the development of a special idea about fashion and business management which started i n L a C o r u ñ a i n t h e e a r l y 6 0 ’s w i t h a t e a m led by Mr. Amancio Ortega Gaona. From its beginning, several features have stood out and become the basis for the Group’s national and international expansion: creativity, painstaking design, innovation, fast response to the market, special attention paid to the interior design of the shops and flexible management.

1998 annual report 14

an idea about fashion associated with an integrated structure

The Inditex Group covers a great part of the production process. It is an organisation in which design, production, supply, distribution, sales and management complement each other with precision. Creativity and efficiency go hand in hand so that its success in its design of collections is accompanied by an appropriate management system.

Inditex is a fashion concept linked to a large management structure.

1998 annual report 15

flexibility

fashion in the Inditex Group is interactive

The distinctive stamp of the Inditex Group is its flexibility.

IIts working philosophy, enthusiasm.

Throughout this long production process, which begins in the design department and ends in the shop windows, there are no rigid structures but rather working centres and decision-making bodies which are absolutely adaptable to the changing conditions of the market and, which are driven by endless enthusiasm and creativity.

1998 annual report 16

enthusiasm

1995

5.627

1996

6.463

average number of employees Persons/year.

1997

8.368

1998

11.968

People are the energy that moves the Inditex Group and it is precisely in those 12.000 employees, distributed in different tasks, that the heart of the company beats. A team which promotes the enterprising spirit, professionalism, involvement and enthusiasm of the people who make it up.

Thanks to them, it is a reality.

1998 annual report 17

creativity

we establish communication with the client not only through the garments but also through our shops

The client is the base that supports the strength of the Group. Knowing their desires, responding promptly, maintaining a constant dialogue with them in those meeting points which are the shops; here we have the pivots upon which Fashion rests.

The public is both the origin and the destination of the long journey travelled by a garment from the moment it is born in the designer’s imagination till it is offered in the shop.

1998 annual report 18

the motivating idea of the Inditex Group is to bring fashion closer to people

1996

233.374

1997

261.372 total sales area Sq. Metres

1998

327.490

The Inditex Group adapts itself to the complexity of the markets by diversifying i t s o f f e r, c r e a t i n g a n d i n c o r p o r a t i n g different chains each with its own personality and strategies: ZARA, Massimo Dutti, Pull&Bear, Bershka.

1998 annual report 20

innovation

in contrast to the idea of fashion as a privilege we propose a fashion that invades the street and that takes inspiration from the taste, desires and lifestyle of modern men and women.

1998 annual report 21

1998 annual report 23

dressing ideas, trends and tastes

ZARA represents the first step in the development of this special idea about fashion and business management, which began when the first shop was opened in La Coru単a in 1975.

after 24 years, the ZARA concept is now present in 16 countries with a network of more than 350 shops.

The conviction that frontiers will not prevent the sharing of the same clothing culture is the main principal of the expansion process in progress which, although adapting itself to the peculiarities of each country, has common guidelines such as privileged locations in the main cities, and exquisite care of the facades, shop windows and interior design.

1998 annual report 25

In ZARA, design is understood as a process closely linked to the client through a continual flow of information arriving from our shops, which capture, process and transmit the worries and demands of customers to a team of more than 200 professionals.

This process, backed up by 25 manufacturing companies and advanced technologies, allows us to respond to the demands of the market by creating more than 11.000 different designs a year. ZARA knows how to move in step with society, dressing those ideas, trends and tastes that this society has been thinking out. That is the reason for its success among people, cultures and generations who, in spite of their differences, share the same longing for a fashion for everyone in which the designer and the client walk hand in hand. Customer service is also reflected in the care given to the shops. The idea is that the public will feel comfortable, enjoy the environment provided and appreciate the clothes on display. The shops are designed to create a special atmosphere that makes the client feel the pleasure of shopping.

1998 annual report 26

1998 annual report 27

Pull&Bear

a lifestyle

1998 annual report 28

at the end of FY1998, and as a result of a continuous process of expansion, Pull & Bear has opened more than 200 shops in 9 countries.

The chain of fashion shops Pull & Bear was born in 1991, as a result of a strategy of market diversification begun by the Inditex Group. At that time, the public was demanding basic style fashion, influenced by international trends, a fashion which could also adapt quickly to their needs respecting three basic premises: fashion, price and quality. This is the combination that Pull & Bear offers to its clients as a higher added value.

1998 annual report 29

The Pull & Bear design team carries out rigorous research into fashion trends, fabrics design and the design of collection. The development and quality control of the samples result in the creation of new designs each season.

Pull & Bear has known how to respond to its clients’ demands and has continued evolving and growing in order to satisfy their new requirements: more sophisticated garments, more casual and urban fashion, a concept that enters strongly into fashion trends influenced by the technological advances in casual wear. A simple and pure appearance without superfluous elements (XDYE brand), womens’ fashion, perfumery products, accessories and even a range for home decoration (P&B Decoration), maintaining the highest standards of quality and the best prices. The philosophy of the business is very clear: the Pull & Bear shops offer what the client wants to buy at every moment.

1998 annual report 30

Massimo Dutti

functionality and design

Massimo Dutti was born in 1985 as a company dedicated to the commercialization of men’s clothing and accessories.

However, in June 1995, based on the success achieved by this format, it was decided to increase its offer and create the women’s line Massimo Dutti Woman.

Massimo Dutti, has more than 150 shops located in nine countries. The success of the brand is the result of a universal design that crosses frontiers in order to connect with the urban, independent and cosmopolitan men and women of today.

1998 annual report 32

Massimo Dutti makes it easier to interpret the different roles played by men and women in our society. It presents complete ranges, from the most urban style to casual wear, an expression of comfort and adaptability. Massimo Dutti garments adapt to any kind of situation, it just takes the right accessories. Handbags, sunglasses, scarfs, ties, shoes and an endless number of Massimo Dutti accessories which are at the ser vice of the clients let them decide the image they want to present, from the most sober and practical for the day to the most sophisticated and elegant for the evening. Furthermore, a new line of home furnishing accessories has been introduced, “Detalles�.

Basic traditional styles, updated by new generation fabrics, but always practical, pleasant and of quality, discreet textures, 100% natural fabrics and innovative mixtures offer as a result an impeccable image with the guarantee of maximum comfort. A cared style which is coherent with the sobriety, elegance and minimalism that characterises the Massimo Dutti collections.

1998 annual report 33

sobriety, quality and confort

1998 annual report 34

Bershka

Bershka was born in April 1998 and represents a new concept both of shops and of fashion,

more than a product an attitude

maintaining the Group philosophy of keeping sensitive to the people’s tastes and responding quickly to their demands.

In this, its first FY, Bershka has opened about 40 shops in Spain and Portugal. These shops represent the first step in its expansion project.

1998 annual report 36

Bershka shops are big, spacious and with the wish to be a meeting point for fashion, music and street art. At the entrance, the logo “meeting point”, taken from airports, stress the intention of creating ultra modern environments where young people can feel in their own space. Big pictures on the walls, advertising photos so enlarged as to seem to be wall paper, as well original graffiti on uncovered walls of brick, metal or design. You can watch videos, listen to the latest CDs , buy drinks, read magazines... It is a store where the experience of buying fashion becomes a sociocultural immersion in the aesthetic of the “youth culture” of the end of the century.

1998 annual report 37

modern, urban and fun environment

More than a product it is an idea, an attitude.

Stepping into a BERSHKA shop is like jumping deep into the urban, fun and ultra modern ambience with a unique look and affordable prices. There is also a big and ever changing range of shoes, bags, belts, sunglasses, watches, lipsticks, nail polish,... All of them with the radical BERSHKA style.

1998 annual report 38